A job-hopping slowdown could be a boon for retirement savings

When it comes to boosting your salary, it pays to ... stay?

That's the newest finding from wage growth data out of the Federal Reserve Bank of Atlanta, which tracks the three-month rolling average of median wage growth for "job switchers" and "job stayers."

A tight labor market in recent years helped drive wage growth for job switchers far above what workers who stayed in their current positions saw. That gap hit a multi-decade high in August 2022, when job switchers saw their median wage growth hit 8.4%, 2.8 percentage points higher than wage growth for job stayers during that time.

Wage growth for the two groups has been converging over recent years, with job stayers now seeing higher median wage growth. In February, workers who switched jobs saw 0.2 percentage points less wage growth than those who stayed. That's the most that job switcher wage growth has lagged job stayers in over six years.

The bright side to a gloomy trend

Slowing wage growth is hardly ideal for workers looking to boost their income, but financial advisors say the shift could offer a silver lining for long-term retirement savings.

"Job-hopping can no doubt be detrimental to retirement savings," said Carla Adams, founder of Ametrine Wealth in Lake Orion, Michigan.

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Recent research from Vanguard supports that claim. Researchers looking at earnings from over 50,000 job switchers found that a worker starting with a $60,000 salary who changes jobs eight times throughout their career could forfeit an estimated $300,000 in total retirement savings.

"The typical (median) job switcher experienced a 10% pay increase in our income sample," the authors wrote. "Despite this notable increase, the median job switcher saw a 0.7 percentage point drop in their saving rate."

Adams said that drop is likely due to low auto-enrollment rates in employee-sponsored retirement accounts.

Under Secure 2.0, companies must auto-enroll employees in most 401(k) and 403(b) plans. Doing so can help boost retirement savings participation, but advisors say the standard contribution rates aren't high enough to adequately save for retirement.

Auto-enrollment plans typically set employee contributions at between 3% to 6% of their pay. Many plans now include an "auto-escalation" feature that increases the employee's contribution rate by 1% annually until it reaches a maximum of 10%. That feature helps, but it can take years to reach its escalation cap, Adams said. For someone who was contributing 10% at their previous job, starting a new role where they are auto-enrolled at only 3% can significantly reduce their contribution rate.

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"Employees can, of course, override the auto-enroll contribution rate and opt for a higher rate from the get-go, a great solution to this issue," Adams said. "However, many people neglect to do this. Starting a new job is overwhelming enough and new employees have plenty of forms from HR to fill out in addition to learning their new job, so overriding auto-enrollment contribution rates often gets overlooked."

Theoretically, job switchers who receive large salary boosts could see their retirement contributions increase in dollar terms even as their savings rate decreases. In Vanguard's study, job switchers who saw more than a 10% increase in their wages managed to save more in terms of absolute dollars, even while contributing a lower percentage of their total wages.

Still, such significant wage jumps are outside the norm. That's especially true when looking at wage boosts for job switchers now. Data used in Vanguard's research ranged from 2014 to 2022, when job switchers saw greater wage growth compared to job stayers.

For advisors working with clients considering a job switch, it's important to remind them to set their contribution rates to a suitable level for their retirement goals, usually above the default rate.

Watch out for vesting schedules

Frequent job-hoppers can also lose out on retirement savings due to restrictions on vesting periods of employer-matched contributions.

"Employer matching and profit sharing contributions can be a great employee benefit; however, they can be fully or partially lost for employees who job-hop," Adams said.

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The Employee Retirement Income Security Act (ERISA) requires employer contributions to become fully vested through one of two schedules. Under the three-year cliff vesting schedule, employer contributions become entirely the employee's after three full years of service, with no vesting before the three-year mark. Alternatively, under the six-year graded vesting schedule, employer contributions vest incrementally: 20% after two years, 40% after three years, 60% after four years, 80% after five years and 100% after six years of service.

Some companies might offer immediate vesting for their employer contributions, but doing so is not required under the law. It's crucial that advisors check with their clients to see what the vesting schedule is for their employer-sponsored retirement plans before making the switch to another job.

"If an employee leaves a job prior to their employer matches being fully vested, they lose some or all of the employer contributions that were made to their plan, decreasing their 401k balance," Adams said.

Watching out for these common pitfalls can help avoid some of the drawbacks to job switching, but such strategies may be moot if the new wage growth trend continues. As long as job switcher wage growth lags that of job stayers, advisors might be better off telling their clients to stay where they're at for the moment.